For decades, the pharmaceutical industry was marked by high profit margins and stable growth rates, resulting from patents and innovative products. Over the last few years, however, market dynamics have changed considerably. The popularization of generic drugs and the expiration of patents drive a more aggressive competitive scenario, marked by the need to replace the portfolio, at the same time that there is increasing pressure on price formation in the sector.
As a result, the segment seeks new ways to increase margins by improving efficiency throughout the supply chain. In this context, the logistics operator plays an important role in meeting all the demands of this sector, which has its own requirements and requires a high level of service.
The article aims to present the opportunity of outsourcing logistics in the pharmaceutical industry and the challenges encountered in selecting partners for the operation. The content of the article brings together ILOS experiences, arising from projects and research carried out by the institute's consulting sub-segment focused exclusively on the health sector.
General Overview of the Pharmaceutical Industry in Brazil
The Brazilian pharmaceutical industry has been influenced by two main factors: important regulatory frameworks, from the second half of the 1990s, and the high growth of domestic demand, from 2004.
With the creation of Anvisa (National Health Surveillance Agency) in 1999, the demands for regulation in all processes in the chain intensified, increasing the complexity of operations and promoting significant changes.
The growth in domestic demand boosted the pharmaceutical industry and the drivers were:
- Increase in the purchasing power of the population during the last decade;
- Increased awareness on the part of individuals that they should take better care of themselves;
- Greater availability of technological resources;
- Increased life expectancy;
- Government investments.
According to the Union of the Pharmaceutical Products Industry in the State of São Paulo (Sindusfarma), the pharmaceutical industry should end 2014 with a growth rate of 10% to 12%, close to the rates of previous years.
Added to this, the expiration of patents on reference drugs and the participation of generic drugs are factors that put pressure on the pharmaceutical industry for cost reductions. The new competition scenario and the high level of service requirements bring the need to evolve the supply chain in an integrated manner, so that the industry can obtain gains in operational efficiency.
The historical detachment of the pharmaceutical industry towards logistics creates opportunities for logistics operators, who emerge as holders of the logistics know-how that the sector needs in the short term.
Outsourcing in the Pharmaceutical Industry
The pharmaceutical industry plays an important role in the healthcare supply chain. The relationship with the links in the chain involves high complexity, which results from factors such as the large fraction and the number of SKUs.
Search for integrated action in the chain, high service level requirements and the presence of regulatory issues are the main current characteristics of the sector, which also works with high added value products, high finished product inventories and poorly positioned in the distribution channels , in addition to giving significant attention to transport lead times.
Figure 1 presents, in a simplified way, the location of the pharmaceutical industry in the logistics chain of the health sector.
Figure 1 – Location of the pharmaceutical industry in the health sector's logistics chain
Source: Reverse Logistics for the Medicines Sector – Brazilian Agency for Industrial Development – ABDI
As we can see in Figure 1, the sector's supply chain encompasses several players. In general, distributors operate with their own logistics structure, so there is little space in this market for logistics operators to operate. On the other hand, hospitals and health plans show a movement towards introducing the concept of logistics in their operations, enhancing market opportunities for logistics service providers (LSP).
The pharmaceutical industry still has operational gaps in terms of automation and storage solutions, in addition to specific restrictions with regard to the handling and transportation of medicines. Such quests for improvement and development open up great potential for outsourcing.
In addition to the possibility of cost reduction, the main motivators for outsourcing in the pharmaceutical industry are linked to:
- Know-how to optimize operations;
- Difficulties in balancing specific requirements: delicate cargo, traceability, speed and temperature control;
- Inventory visibility (location, movement and control);
- Complex regulatory environment; and others.
Selection of Psls in the Pharmaceutical Industry
Faced with the decision to outsource the logistics operations, the first difficulty arises in setting up the Strategic Sourcing project team. In some cases, specialized consultancies support the company with structured processes and benchmarking. Given the unique characteristics of the sector, some important points must be addressed:
- Criteria for the selection of PSL;
- Means of remuneration for transport services (R$/kg, % of Invoice or R$/trip), and storage (R$/pallet, R$/unit, R$/activity, and others);
- Contractual requirements regarding the improvement of the operation, price and level of service.
The selection process is extremely strategic and critical for the industry. The main steps involved in the Strategic Sourcing process are shown in Figure 2.
Figure 2 – Strategic Sourcing Process
Source: ILOS
The RFI (Request for Information) stage has a fundamental role, mainly in the selection of operators for the pharmaceutical industry, since it raises important characteristics for identifying the capacity of the logistics provider in the operation of medicines. There is even the possibility of technical visits to operators to validate the ability to carry out and confirm the points mentioned in the RFI.
Among the points that can be identified at this stage and that have an impact on the process of the pharmaceutical industry, we have:
- Experience in the activity with operations in the hygiene, health and pharmaceutical sectors;
- Operators' investment capacity, given that there are companies with refrigerated and controlled medicines, which require a specific infrastructure. In addition, there is a big movement in issues of increasing the level of automation, order cycle and control systems, which requires investment from both parties;
- The perception and satisfaction of current operators' customers.
The PSL evaluation process opens up discussion for a series of specific doubts about the operation of the pharmaceutical company in question. The most frequent are linked to:
- Details of the responsibilities of the contracting party and the contracted party, with regard to insurance, financial conditions, investments, licenses and payments for transport and storage services;
- Information about products marketed by the company that are classified as controlled and dangerous;
- Restrictions on the handling of perishable products, given that each pharmaceutical company may have specific procedures, in addition to the required standards;
- Profile, points and frequency of deliveries and service channels;
- Number of SKUs and detailed volumetry;
- Details of the stages of transport and/or storage operations;
- Characteristics of the operation, with regard to the allocation of labor, operating shifts, collection loading process and return process;
- Authorizations and procedures of the contracting company;
- Information on the company's tax flows;
- System interfaces and information that must be generated;
- Period for contracting the services;
- Details on vehicle tracking equipment and shipping necessary shipping information;
- Details of the SLAs and KPIs involved.
The requirements and particularities of the pharmaceutical market make industries to be conservative and careful in outsourcing. Thus, operational tests, transparency in the relationship and quality of service are essential for creating a relationship of trust and security on both sides.
In addition, any inefficiencies in the operation must be known to both parties and action plans to fill these gaps must be built by mutual agreement, in order to guarantee trust, good relationship and success in outsourcing.
Challenges for Logistics Operators
The opening of the pharmaceutical market to outsourcing and the attractiveness of prices in the transport of medicines is mobilizing providers of logistical services to fulfill the necessary requirements to enter this market, such as the acquisition of licenses and certificates. However, these legalizations are the starting point for other requirements that are decisive for the operation.
Some of the main specifications of the pharmaceutical industry are:
Service level
- Compliance with agreed lead times;
- People trained and able to handle medications
- Flexibility and agility;
- High operational performance.
Quality
- High quality standards, which are controlled;
- Compliance with required licenses and certificates: Anvisa, regional agencies, pharmacy councils (Federal and Regional); authorization for controlled products, following ordinances and resolutions established by law, certificate from the Army, Civil and Federal Police, licenses from Cetesb and Ibama (when applicable), technical manager registered with the Regional Council of Pharmacy and adoption of "Good Pharmacy Practices" Transport and Storage”;
- Low level of nonconformities;
- Segregated/air-conditioned areas for packaging products with this specific requirement, such as refrigerated products and vaccines;
- Sanitized areas that meet industry standards and procedures, with air-conditioned locations and adequate hygiene requirements;
- Segregated quarantine areas for products;
- Segregated areas for products of a controlled nature.
Services
- Experience in operations in the hygiene, health and pharmaceutical sector and / or good recommendations from current customers;
- WMS system for warehouses;
- Good financial health;
- Fiscal and tax knowledge, important for some specificities of the operation with other links in the health sector chain.
Infrastructure
- Investment in infrastructure, such as cold rooms, air conditioning, warehouse management systems, routing systems and equipment needed to move products;
- Information via EDI;
- Vehicles with temperature control and monitoring;
- 24 hours tracking;
- More complex and critical Risk Management Plans in the process.
The entry into force of Resolution nº 54, of December 10, 2013, by Anvisa, brings a new systematic for the standardization of the tracking system of all medicines produced. An innovative measure that generates impacts on the way each unit is produced, controlled and tracked, with advantages of gains in reducing the number of deviations and greater unit control of each drug produced, the legislative resolution increases the complexity of specifications in the sector.
The range of requirements, many of them specific to the pharmaceutical sector, is a challenge for medium to large-sized logistics operators and carriers, making it difficult for the pharmaceutical industry to approach the self-employed market, which have the greatest representation in Brazilian transport.
For a long time, there was a very select group of logistics operators active in the sector. These are renowned operators who meet the requirements of the pharmaceutical market, able to operate with excellence and quality. There was, therefore, a tendency for companies to look for logistics operators that already had the know-how and structure capable of meeting the expectations of storing and transporting medicines. However, in recent years, there has been a movement towards adapting operators and carriers that are looking to gain space in this market. Among the carriers and logistics operators registered in Brazil, it is estimated that 30% have licenses and certificates from Anvisa for the transport of medicines. This number illustrates that there is already a mobilization of the market in sanitary legalization, even if the number of carriers that are not qualified to transport medicines predominates.
Figure 3 shows data collected in a survey carried out by the Institute of Logistics and Supply Chain with medium to large transporters, operating in the health sector, in relation to the technologies used in transport for the sector.
Figure 3 - Technology used by carriers in the health segment
Source: ILOS
It is possible to observe that carriers in this segment are increasingly demanding with regard to technologies, especially those for vehicle and cargo tracking. Even so, there is a need for investments and improvements by carriers already active in the sector.
The increase, albeit timid, of players in this segment allowed the industry to start questioning the very way in which contracts with LSPs are signed. The freight contracting model is a clear example of this.
Many companies in the healthcare sector adopt a freight payment model based on the invoice percentage. In this model, there is no gain in productivity or efficiency of the operation, since the freight charged is independent of the type of transport (fractional or freight) and the distances covered. There is a movement in the pharmaceutical industry to change the contracting method to a format in R$/kg, R$/t or R$/m3.
Another trend in the segment is the internal development of transport intelligence. The creation of its own transport management area makes room in the industry for a model of contracting several carriers to carry out transport, a practice currently well developed in the consumer goods sector, but which, for the health sector, is something new and which has been seen as an opportunity to reduce costs and improve transport operations.
Conclusions
Previously, the pharmaceutical industry, with its high profit margins, was not impacted by logistical issues. The changes and evolution of the market, however, were motivators for the emergence of concern with interconnected, efficient and optimized logistics operations in the sector.
Changes in the regulatory environment involve important and frequent restrictions, with increasing technological requirements and traceability of the drug chain. Resolution 54/2013 is a clear example of the pharmaceutical industry's challenge. In this context, logistics service providers emerge as a support option and solution providers in the face of a turbulent scenario of change.
The opening of the pharmaceutical market to outsourcing led to a movement on the part of operators and carriers towards adequacy in the transport of medicines. The market has become more specialized and there has been an increase in the number of operators capable of transporting medication.
Even so, it is a challenge for both the industry and the logistics service providers to ensure that the partnership is beneficial to both sides and marked by a win-win relationship in the services provided. The trust and knowledge of the service provided mean that, today, there is still a predominance of partnerships between large operators and the pharmaceutical industry.
As new LSPs specialize and offer a quality and transparent service, they emerge as strong competitors of traditionally established players in the pharmaceutical sector.
The company's success in outsourcing depends on the relationship between cost and quality and the efficiency of the supply chain, in addition to the strategy defined to deal with the trade-off between outsourcing opportunities, whether in stocks and/or transport, taking into account the complexity of the sector.
References
- http://portal.anvisa.gov.br/
– Reverse Logistics for the Medicines Sector – 2013 – Brazilian Agency for Industrial Development – ABDI
- http://www.sindusfarma.org.br/
- http://conselho.saude.gov.br/
– ILOS 2014 Panorama
To reference the article in your publication, use:
SETEM, J. Logistics in the pharmaceutical industry: challenges and opportunities in outsourcing. Tecnologística Magazine, São Paulo, Year XX, n. 230, p. 36-40, Jan. 2015.
